“The Gobbledygook of Cost Estimating”

Original Post Date: Wednesday, September 25, 2013

In a recent National Public Radio (NPR) interview, Winslow Wheeler (Director of the Straus Military Reform Project of the Project on Government Oversight in Washington, D.C.), spoke on the recent problems with the Joint Strike Fighter acquisition process. “Wheeler explained that Lockheed Martin, the manufacturer of the jet, uses a pricing vocabulary that masks costs. ‘Flyaway costs, non-recurring and recurring costs, and lots of gobbledygook, and they’ll say that comes to a number like $60-$70 million dollars. And, it’s complete baloney,’ said Wheeler.” (pogo.org)

The F-35 has the distinction of being the most expensive weapon program of all time, with an estimated life cycle cost of $1.5 Trillion. Yes, that’s Trillion, with a capital T. What is unfortunately a very indistinctive characteristic, the program has been plagued with delays, cost growth, and other issues. The interview with Mr. Wheeler highlights the overarching dismay and mistrust within the acquisition community towards the government and industry alike.

So, does Mr. Wheeler have a point? I can recall being asked “What does an F-22 cost?” by family or friends when I was working in that particular program office. They hear reports of cost growth and other problems in the news and want to hear from someone with first-hand knowledge. I admit, my answer was confusing, evasive, and downright “gobbledygook.” I’d ask if they meant recurring or including non-recurring? PAUC or APUC? Total life cycle or just production? Which lot of aircraft are they referring to? You could see their eyes start to roll back into their heads as they looked for the closest open window to escape.

The truth is, cost estimating is a complex, sometimes confusing business. As the saying goes…if it were easy, everyone would be doing it. That does not preclude the estimator from trying to communicate succinctly with others. After all, communicating is a major portion of our job.

In order to decode some of the “baloney” that Mr. Wheeler spoke about, I’ll add a refresher chart, courtesy of the Defense Acquisition University. (dau.mil)

As we see above, the cost of a Major Defense Acquisition Program (MDAP) can be broken down in many ways. This will undoubtedly lead to confusion for those not familiar with the concepts shown above. We tend to break up costs by phase of the acquisition, which loosely corresponds to different Appropriations. The major categories include Development, or RDT&E; then Procurement, or Production; then Operating and Support, also called O&S or O&M; and finally, Disposal. Acquisition costs deal with the first two categories, which are explained in more detail below.

Within Development and Procurement, we have a few sub categories. Think of the chart above as a Venn diagram. For Development, we break costs into Research, Development, Test, and Evaluation (RDT&E) and Military Construction (MILCON). This overall cost represents the expenditures required simply to get the weapon system to a point where it can be produced. Before it is produced, it must be designed, tested, etc. In a large and complex program, these costs can be substantial. Do we include a portion of this cost in each unit we produce? Sometimes, we do. It seems pundits choose to add this “sunk” cost to the recurring unit cost if the goal is to make the weapon platform seem too expensive. On the other hand, if we are trying to make the weapon system appear more “affordable,” we may only provide the Flyaway Cost, which we will discuss next.

Next, we have the Procurement cost, which is divided into three sub categories. First, the Flyaway Cost mentioned at the beginning of this article is simply the procurement cost of the Prime Mission Equipment. That would be the cost of the production of one F-22 as it rolled off the assembly line. However, any good maintainer will tell you that the F-22 isn’t going to go very far without the necessary support equipment. When we add the support equipment, this becomes the Weapon System Cost. Finally, when we add the cost of spares, we now have the total Procurement Cost.

I propose the reason we separate costs is, not to confuse lawmakers or the public, but because we are acquiring extremely expensive and sophisticated weapon systems through extremely complex fiscal regulations and oversight. Costs may be reported in various ways. Yes, the cost of a weapon system is often reported within some context of a larger agenda, usually either in support or attack of the acquisition program. Remember that our main job is to communicate cost requirements to decision makers. We are in a unique position to help the decision makers understand what these costs mean.

If you’ve ever taken a TruePlanning® basic hardware or software course, you likely spent some time discussing model results, as well as how to document these results and communicate them to decision makers. TruePlanning® has a robust reporting function that succinctly communicates costs in a number of ways (hundreds and hundreds of ways, in fact). We are able to clearly communicate costs and labor hours for various phases and activities. Also, our metrics are automatically calculated and display key information such as unit cost, learning curve information, cost per weight or line of code, et cetera.

As I mentioned earlier, it is still up to the estimator to communicate this information clearly and accurately to the decision makers. With the built-in report generator and output options in TruePlanning®, your job will be made much easier and will avoid the “gobbledygook” that Mr. Wheeler spoke of.